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SUSTAINABILITY OF THE FRIEDMAN RULE IN AN INTERNATIONAL MONETARY POLICY GAME
Author(s) -
JANSEN DENNIS W.,
LIU LIQUN,
WENG MINGJANG
Publication year - 2007
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2007.00043.x
Subject(s) - commit , economics , monetary policy , order (exchange) , government (linguistics) , open economy , monetary economics , private sector , friedman rule , macroeconomics , finance , exchange rate , economic growth , linguistics , philosophy , database , computer science
This article develops a two‐country monetary economy model in order to analyze the international monetary policy game between governments and the domestic monetary policy game between each government and its private sector. We prove that if governments can commit to their own private sectors, the cooperative equilibrium of the game between governments is for them to follow the Friedman rule. When governments lack such ability to commit, we find that the Friedman rule is more likely to be sustained in our open‐economy model than in the closed‐economy model of Ireland. ( JEL E31, E52, E61)